Economic recovery, iPhone 8 trading theme and the expansion of the stock lists under the Shenzhen-Hong Kong stock link program are some of the catalysts of the recent small and mid cap rally. Photo: China Daily

HK Equities: Why small and mid caps are worth a bet

North Korea’s latest nuclear bomb test has had a very limited impact on the financial markets. Investors are getting used to these noises. Risks and opportunities co-exist in our daily life, so is it with with investing.

There might be some selling pressure in the short term, as some speculators might be a bit overstretched and have built up too big a position. Nevertheless, such selling pressure will be manageable.

Meanwhile, big caps seem to have encountered some resistance while the momentum is shifting to small and mid-cap plays.

Second, a number of stocks have been added to the Shenzhen-Hong Kong Stock Connect program, which has accelerated price gains.

Third, several Apple-related stocks have taken a ride on the upcoming launch of iPhone 8.

I’ve also made some bets on this trend, partly to take advantage of the momentum and partly to diversify my portfolio.

Heavyweight stocks have dominated the market rally in the Hong Kong and mainland markets over past year or so due to strong fundamentals.

In fact, a large number of investors have used ETFs (exchange-traded funds) as a main investment tool, which all added to the buying interest in heavyweight plays.

But if this group of ETF investors retreats in the future, these blue-chip stocks might suffer.

Certainly, small and mid-cap stocks have high liquidity risk. They might be dumped immediately when the winds of change start to blow.

But at the moment, momentum is on their side. In other words, the risk is there, but you have to combine it with the potential reward when assessing whether they are worthy of your investment money.

I believe the party for small-cap stocks has just started. But to make this work, we need to do it on a portfolio basis rather than punting on one or two individual plays. This is a key point investors need to bear in mind in managing the risk of this class of relatively volatile stocks.

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